Luxembourg

Basel III / CRD IV  

The G20 endorsed the new ‘Basel 3’ capital and liquidity requirements at their November 2010 Summit in Seoul.  As a consequence, the Basel Committee on Banking Supervision (BCBS) has issued its two final documents “Basel III: A global regulatory framework for more resilient banks and banking systems” and “Basel III: International framework for liquidity risk management, standards and monitoring”.

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Sven Mühlenbrock
Partner

Tel. +352 22 51 51 - 6819
sven.muehlenbrock@kpmg.lu

Basel III is only one element of a fundamental restructuring of the approach to risk and regulation in the financial sector. Each area of change – governance, supervision, market structure of derivatives and customer treatment to name a few – has a separate consultation, debate and implementation phase.  Compared with the implementation of Basel II, this enhanced level of dynamism, complexity and interdependency within the global regulatory landscape, which has particularly changed in Europe with the new European Banking Authority located in London, will add significant challenge to the implementation of the new requirements.

 

The BCBS agreement on the new minimum requirements, which are mainly those as published in December 2009, includes

 

  • a tightened definition of capital, including a focus on common equity
  • increased minimum capital ratios
  • an additional non-risk weighted leverage ratio to be met
  • proposals for capital conservation and counter cyclical buffers
  • strengthening risk capture notably counterparty risk
  • strengthening sound Risk Management practices
  • additional capital surcharges for systemic banks
  • a global liquidity standard, including a liquidity coverage ratio (which ensures sufficient liquid assets to cover short term outflows in times of stress) and a net stable funding ratio (to limit reliance on short term wholesale funding).

 

European Transposition of Basel III by Capital Requirement Directive (CRD IV)

 

The CRD IV transposes the Basel III framework into European Legislation. It also introduces a number of changes to the banking regulatory framework which consist of

 

  • further enhancements to the governance and effective risk management (including ICAAP)
  • application of sanctions
  • enhanced supervision
  • reducing reliance on external credit ratings
  • “single rule book” be removing national regulatory options and discretions

 

The CRD IV becomes effective by 1 January 2013. These new rules are applicable in Luxembourg at the same time.

 

What are the next steps a bank should take?

 

  • Assessing the impact of the new regulatory requirements on your corporate strategy, business model, risk appetite, investment decisions and business development activity.
  • Implementation of  new requirements
  • Training/ workshops on new regulatory requirements
  • Developing/ revise capital (and tax) efficient transactions
  • Improving risk taking capacity, i.e. implementing internal measurement models such as credit (A-IRB), operational (AMA) and market risk to reduce capital burden and enhance risk management and capital efficiency.
  • Extending current risk management frameworks, capital adequacy and controlling tools, processes and procedures towards an integrated bank wide risk management system;
    Enhancing awareness of the profitability of your businesses and product pricing, due to a full reflection of capital consumption.

 

Our experts with industry, regulatory and academic background and experience, would be pleased to accompany you in the next steps.

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